Report: Feds Downplaying Student Loan Defaults

Students attend the Vassar College 2010 commencement at Vassar College on May 23, 2010 in Poughkeepsie, New York.
Students attend the Vassar College 2010 commencement at Vassar College on May 23, 2010 in Poughkeepsie, New York. Andy Kropa/Getty Images

One in every five government loans that entered repayment in 1995 has gone into default, according to a recent report released by The Chronicle of Higher Education. The Department of Education is undercounting student loan defaults.

"One in every five government loans that entered repayment in 1995 has gone into default," according to a recent report released by The Chronicle of Higher Education. "The default rate is higher for loans made to students from two-year colleges, and higher still, reaching 40 percent, for those who attended for-profit institutions."

Each year, the Education Department publishes the rate of the number of borrowers who have defaulted within two years of graduating -- but the Chronicle delved deeper and pulled up the information for the past 15 years.

"We found that the rate is significantly higher than what the Education Department has reported, and that they're really undercounting the number of defaults that are occurring," Chronicle reporter Kelly Field tells NPR's Robert Siegel.

Under a government rule, an institution must have less than 90 percent of its funds from student loans and grants. When it comes to default levels -- an institution can't have more than 40 percent in a single year or more than 25 percent over a 3-year period, Field says. But historically, institutions have not come close to these levels because the Education Department has only tracked 2-year windows.

"Next year they're switching to a 3-year window, which will capture many more defaults," Field says. "More institutions will be pushing up against that limit."

The default rate is probably higher at for-profit institutions because they're considerably more expensive than community colleges or other public schools. In the current academic year, the average tuition and fees a for-profits was $14,000, compared with $2,500 for the average community college.

But the institution does not carry most of the burden -- the student does.

"[The institutions] aren't responsible for paying any of the debt," Field says. "The only consequence they would suffer is if their defaults are high enough for them to lose the eligibility to award student aid."

The Education Department is also proposing to penalize schools where the students carry high debt to income ratios and have low loan repayment rates, Field says. In those cases, the institutions would be ineligible to receive student aid.

Field says she's "somewhat surprised" by her findings.

"This really shows that students are really suffering the consequences of student loan defaults, even years after they graduate, default rates continue to climb over time -- and the cost to tax payers is really much greater than anyone thought."

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